Netflix Company Analysis Essay

Total Length: 2893 words ( 10 double-spaced pages)

Total Sources: 4

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Organizational Context

Netflix is an entertainment company based in the United States that specializes on online on-demand streaming video, in addition to a DVD-by-mail service in America. The organization was founded in Scotts Valley in 1997 and two years later began its prevailing consumer subscription model. In the present day, Netflix’s consumer base comprises of more than 117 million subscribers in 190 nations across the world. Netflix are a forerunner in the internet delivery of television shows and movies, unveiling their streaming services in the 2007 financial years. From that point onwards, the company has developed an ecosystem for internet linked screens and have also brought in progressively more amounts of content that facilitate consumers to enjoy television shows and movies directly on their screens that are connected to the internet. Owing to these significant endeavors, Netflix has been able to experience increasing consumer acceptance of, and vesting in, the delivery of television shows and movies directly over the internet (Netflix, 2018).

The business operations of Netflix are categorized into three different segments including Domestic streaming, International streaming, and Domestic DVD. First of all, the domestic streaming business segment generates revenues from membership fees for a monthly basis for services that comprise of solely streaming content to their members in America. Secondly, the international streaming business segment generates revenues from membership fees on a monthly basis for services that comprise of only streaming content to their members or subscribers that reside outside of the United States. Lastly, the Domestic DVD business segment generates revenues from membership fees on a monthly basis for services that comprise of only DVD by mail (Netflix, 2018).

In the 2011 financial year, Netflix transformed its business model by increasing its original content and making major investments in its own original series. Some of the renowned television series that have been successful comprise of House of Cards and Orange is the New Black. Furthermore, in 2017, the corporation started an aggressive venture into the production of feature films, with the main objective of unveiling numerous films. Different from conventional broadcasters, the main objective of Netflix is not to be attractive to as extensive an audience as conceivable but instead to cater to niches and efficaciously give every portion of the populace to a television show or a movie they are unable to live without. The key strategy that Netflix employs to provide consumers with these product offerings is by growing their streaming membership business internationally within the parameters of their profit margin targets. The company is incessantly enhancing the experience of their members through the expansion of their streaming content with an emphasis on a programming amalgamation of content that fascinates and exhilarates their members. What is more, Netflix are incessantly improving their use interface and protracting their streaming services to an increasingly higher number of screens that are connected to the internet. This has made it possible for the subscribers to be able to download a variety of titles that can be viewed when offline. Most of all, Netflix continues to grow and develop their streaming services not only locally but also globally (Netflix, 2018).

Recent Financial Performance

Consolidated Income Statement Analysis

The income statement is a financial statement that demonstrates the revenue generated, the expenses incurred and the resulting profit or losses of an entity for a particular time period. These financial statements are fashioned for managers within the entity to report the financial status of business operations in the course of the financial year. The income statement divulges how profitable an entity is and whether there is the expectation of financial growth and profitability in the future. It reveals to the external stakeholders whether investments in such an entity will generate positive earnings and also if the entity has the ability to recompense its loans (Weygandt, Kimmel, & Kieso, 2009). The assessment of the income statement of Netflix for the past three years indicates that the company’s financial performance has gradually improved in this particular time period. To begin with, the total revenues generated by the company in the past three years have remarkably improved. Notably, the total revenue of Netflix increased from $2.19 billion in 2015 to $2.8 billion in 2016 and further up to $4.03 billion in 2017. This is illustrated in the chart below:

In line with the rise in revenues for the company, there was a progressive increase in the cost of goods sold.
The cost of revenue of the company increased from $4.6 billion in 2015 to $6.02 billion in 2016 and further up to $7.66 billion in 2017. However, the revenues generated by the company were significantly high. In this regard, Netflix generated gross profit increasing from $2.19 billion in 2015 to $4.03 billion in 2017. In the past financial year, Netflix experienced a 44.03 percent increase. The indirect costs of Netflix comprise of different items such as general and administrative costs, marketing costs, as well as technology and development costs. These are the outlays that are spread across the corporation’s revenue. In the past three years, the indirect costs of the company have been increasing with the biggest chunk being the selling and administrative expenses. Imperatively, subtracting the indirect costs of the company from the gross margin of the company brings about the operating income. The operating income of Netflix significantly increased from $305.8 million in 2015 to $379.8 million in 2016 and further up to $838.7 million in 2017.

The net income delineates the profit generated by a corporation subsequent to paying off all of its costs. The net income of Netflix gradually increased…

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…short-term debts with its current assets. One of the key strengths of the company is its current ratio which implies that it has a higher liquidity level. This means that the company is able to cater to the current liabilities and still have returns for stakeholders. In addition, the company has been able to maintain its debt and current liabilities at a suitable level with debt ratio that is lower compared to the industry rivals. This indicates that the company is in great financial health as it can pay its debt when they come due and still have remaining resources.

Cash and other resources of the organization

Netflix has the right amount of cash and other resources to fuel future growth. The organization has over 117 million subscribers across just about every nation across the globe, and hires more than 5,500 individuals in the present day. It generated an amount exceeding $11 billion in revenue in the 2017 financial, and is presently worth around $135 billion, more than most of its major media competitors. Furthermore, Netflix has $8 billion set aside for content this coming financial year and it is projected that this budget will continue to rise at a steady rate. Furthermore, the corporation is developing progressively more programming to appeal to its increasingly international audience. Netflix is also buying out rights to intellectual property in order to gain competitive advantages over studios such as Disney pulling licensing from the platform. What is more, the company made an acquisition of Millaworld and has signed major deals with superstars in movies and televisions in the past year (Rodriguez, 2018). The illustration below indicates the increasing numbers of subscribers, which is a projection of the growth of the organization.

Financial Value of the Company

Market capitalization is the summative market value of a company signified in currency amount. Taking into consideration that it signifies the market value of a corporation, it is calculated on the basis of the current market price of a corporation’s shares and the total number of outstanding shares. The outstanding shares of Netflix are: 436.08 million. The current market share is 337.59

Therefore, the market capitalization of Netflix is (436.08 million × 337.59) = 147.22 billion

The price to earnings ratio is indicative of the dollar amount that an investor can anticipate to invest in a corporation so as to receive one dollar of the corporation’s earnings. The formula for computing price to earnings ratio is as follows:

Price to earnings ratio = Market price / Earnings per share

The price to earnings ratio of Netflix is: 337.59 / 2.80 = 120.57

The P/E ratio of Netflix is 120 times earnings. This high P/E ratio implies that investors in the market are anticipating higher growth of the company….....

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References

Milling, B. E. (2003). The basics of finance: financial tools for non-financial managers. iUniverse.
Netflix. (2018). 2018 Annual Report. Retrieved from: http://www.annualreports.com/HostedData/AnnualReports/PDF/NASDAQ_NFLX_2017.pdf

Rodriguez, A. (2018). Twenty years ago, Netflix.com launched. The movie business has never been the same. Quartz. Retrieved from: https://qz.com/1245933/twenty-years-ago-netflix-com-launched-the-movie-business-has-never-been-the-same/

Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. New York: Nelson Education.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009). Managerial accounting: tools for business decision making. Hoboken: John Wiley & Sons.

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